Section 179 Deduction - What is it & How can it help My Business?
Bonus Accrual and the 2½ Month Rule: New CCA Shines Light on IRS Position Tax Update Authors: and Ellen McElroy It is common industry practice for corporate taxpayers to accrue employee bonuses earned throughout the year with the anticipation that they will be paid within 2 ½ months from the end of the year.
Under Section 404, although deferred compensation payments may be otherwise deductible, i.
Thus, Section 404 generally requires a matching of deferred compensation income and expense.
As a result, deferred compensation payment deductions are generally deferred to a year subsequent to the year of payment.
However, immediate deduction is available in certain circumstances — that is, if the deferred compensation payment satisfies the requirements of Sections 404 and 451.
Under the 2 ½ month rule, companies must meet the following conditions: i the accrual meets the "all events test" and ii it pays the bonus within 2 ½ months after year-end.
To meet the all events test, the liability must be determined with reasonable accuracy and economic performance must have occurred with respect to the liability.
Caution is advised, however, bonus accrual fixed and determinable this may not be as simple as it looks.
A recent Chief Counsel Advice memorandum CCA points out that other variables may preclude the liability bonus accrual fixed and determinable meeting the all events test.
Unpaid bonuses were supposed to revert back to the corporation and be paid to a charity.
Consequently, the IRS concludes that no deduction would be available until the contingency was removed i.
By way of background, the taxpayer sought to treat the bonuses paid within 2 ½ months of the following year as properly accrued and deductible in the previous tax year under an accounting method change.
The taxpayer in the CCA argued that it had a fixed and determinable liability at the end of the first year for 90 percent of the amount accrued for financial statement purposes for its incentive plans for the first year, and thus, was entitled to take it as a deduction in the first year.
The IRS focused on the fact that the liability was not fixed in the first year because the employees had to perform services in the second year and be employed by the taxpayer when the bonuses were paid.
According to the IRS, this meant that the taxpayer did not know at the end of the first year whether it owed bonuses to any employee.
Pepper Perspective Taxpayers looking at preparing their year-end provision should carefully review their incentive compensation plan requirements before taking the benefit of their bonus accrual.
If they do not meet the criteria set forth in the CCA, they may want to consider avenues to mitigate any potential exposure.
Publication of the CCA would indicate that IRS Exam teams will closely scrutinize the treatment of these items.
To the extent that an adjustment is made on Exam, the IRS can make changes e.
Any Exam adjustments will be taken into account immediately.
One way to mitigate any exposure is to file bonus accrual fixed and determinable change in accounting method.
This method change click to see more bonus accrual fixed and determinable automatically and it may be filed with the annual tax return.
Such a change provides audit protection and any unfavorable Section 481 https://deposit-casino-free.website/and/free-casino-games-online-and-win-real-money.html adjustment would be recognized over four years rather than immediately, as would occur in an Exam adjustment.
Another possible remedy may be to make changes to the incentive plan before the bonuses are paid in order to secure the deduction in the previous year.
To ensure that other changes are not made in an earlier year by IRS Exam, it also may be prudent to consider changes to earlier-filed returns through an amended return.
Endnotes Unless otherwise stated, all references to "Section" are to the Internal Revenue Code of 1986, as amended, and bonus accrual fixed and determinable references to the "Regulations" or to "Treas.
Note: And money free CCA points out that the taxpayer did not make any charitable contributions in this way.
Reinstein and Ellen McElroy Bonus accrual fixed and determinable material in this publication was created as of the date set forth above and is based bonus accrual fixed and determinable laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts.
The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.
Internal Revenue Service rules require that we advise you that the tax advice, if any, contained in this publication was not intended or written to be used by you, and cannot be used by you, for the purposes of i avoiding penalties under the Internal Revenue Code or ii promoting, marketing or recommending to another party any transaction or matter addressed herein.
IRS Section 179 Deduction Explained
the all events test (i.e., liability is fixed and determinable) at year-end if any contingency exists. For example, if the bonus plan requires an employee to be employed on the date of the bonus payment, the liability is not fixed and determinable at year -end, but rather at the date of payment. Even in cases where the bonus attributable to a
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